Magazine

The Drexel Connection at Global Crossing

March 10, 2002

A swanky office in Beverly Hills, brash investment bankers scoring hundred-million-dollar paydays, a spectacular collapse ending in federal investigations. The belly flop of Global Crossing Ltd. seems remarkably similar to the saga of Drexel Burnham Lambert Inc., the investment bank that imploded a dozen years ago. In fact, it may be more than coincidence. At least five key players in the startup of Global Crossing were prominent executives at Drexel.

Gary Winnick, Global Crossing's founder and chairman, ran Drexel's convertible bond desk in the early 1980s and sat just a few feet from junk-bond king Michael R. Milken. Less well-known are four of Winnick's Drexel colleagues, now at Toronto-based Canadian Imperial Bank of Commerce (CIBC), which provided a healthy chunk of Global Crossing's initial capital. Because of its investment, CIBC, one of Canada's five largest banks, has realized more than $1.3 billion in profits from Global.

Even as other shareholders have watched the stock sink to pennies a share, CIBC continues to coin money--$200 million in profits in the past three months, thanks to shrewd financial maneuvering. "This isn't about hedging, it's about insider trading.... Over a period of five years [they were] impeccable in their timing," says Jay Province, who owns 35,000 shares and founded a Web site for Global Crossing investors. A spokesman says CIBC had no knowledge that Global's business was souring. He adds that the bank always regards such investments as short-term.

But CIBC's ties to Global may be more complex than a short-term investment. CIBC has a banking relationship with Hutchison Whampoa Ltd., the Hong Kong conglomerate that, in partnership with another company, has offered to buy Global's assets out of bankruptcy. Hutchison Chairman Li Ka-shing is one of CIBC's largest individual shareholders.

CIBC's role in Global Crossing, the fourth-largest bankruptcy in U.S. history, begins with Bruce Raben, a former Drexel dealmaker who joined CIBC in Los Angeles. In late 1996, after Winnick came to him with a plan to lay fiber-optic cable under the Atlantic, Raben took the idea to his colleagues in New York.

Dean C. Kehler, Andrew R. Heyer, and Jay R. Bloom, who ran CIBC's high-yield bond department, had all worked under Drexel dealmaker Leon D. Black. Kehler and Bloom helped finance many of the high-profile buyouts of the 1980s, including RJR Nabisco. Heyer bankrolled takeover artists like Saul P. Steinberg. Under the direction of this group, CIBC in March, 1997, ponied up $41 million for a 25% stake in Global Crossing. Fifteen months later when Global Crossing sold stock to the public, that stake was worth $926 million. CIBC served as an underwriter for the initial offering, earning $20 million in fees for that and other Global Crossing work, according to Thomson Financial. CIBC also received $12 million in stock from a consulting contract with Global.

According to sources familiar with CIBC's investment, Kehler, Heyer, and Bloom invested the bank's money through a partnership that allowed them to keep 18% of the profits from the deal. In a March, 2000, filing with the Securities & Exchange Commission, Kehler and Bloom claimed voting control of 11.4 million Global Crossing shares worth $680 million. Both Kehler and Bloom, as well as Raben and two other CIBC colleagues, served on the Global board at various times from August, 1998, to June, 2000. A bank's spokesman confirmed that the group has disposed of many of their shares. Kehler declined to comment. The others did not respond to a request for comment.

As Global Crossing stock climbed in 1999 and 2000, CIBC was a steady seller. In October, 2000, it announced that it had hedged the bulk of its remaining holdings with other parties, ensuring that CIBC would get no less than $20 per share. The bank still has unrealized gains of $300 million on that position.

In late January, however, CIBC announced that it may have to write off $242 million in Global Crossing loans and preferred stock that it had not hedged. But as any ex-Drexel alum might tell you, that's chump change compared with the killing the bank made. By Christopher Palmeri in Los Angeles, with Mark Clifford in Hong Kong and Mike McNamee in Washington